Wednesday 19 August 2009 17.25 EDT
First published on Wednesday 19 August 2009 17.25 EDT

Expectations were growing in the City tonight that interest rates could remain at historically low levels for years after the Bank of England gave a strong hint that it might again expand its policy of flooding the economy with money.

Gerard Lyons, chief economist at Standard Chartered Bank, said it was now possible that King would not raise interest rates from their current all-time low of 0.5% during his current term as governor, which lasts until mid-2013.

"The Bank should be congratulated on their practical response to this crisis. There is no way that the Bank of England is going to prematurely tighten policy," he said.

Other economists said that because whichever party winning next year's election would have to cut spending and raise taxes to close the enormous budget deficit, the resulting fiscal squeeze would mean interest rates would probably be kept very low to keep the economy moving.

King, along with external members Tim Besley and David Miles, voted to raise the Bank's policy of quantitative easing by £75bn to £200bn in an attempt to ensure that economic recovery takes hold. The other six members, though, were only prepared to sanction a rise of £50bn.

The vote marks only the third time since he became governor in 2003 that King has been outvoted and the first time that none of the Bank's internal MPC members have voted with their boss.

The pound fell sharply as traders digested the news that King was more gloomy about the economy than previously thought - despite his warnings last week that any recovery could be "slow and protracted". Sterling had recovered some of its losses by the close, however, to trade around $1.65 and €1.16.

The Liberal Democrat economics spokesman, Vince Cable, said: "It is clear that several members of the MPC still believe the greatest danger the country faces is a prolonged recession and deflation. These minutes further underline the massive uncertainty the economy faces."

George Osborne, the shadow chancellor, said: "While we all hope that the formal end of the recession is approaching, it is clear from these minutes that the recovery will be long and difficult and the debt problems are huge."

King has been growing increasingly concerned that with the banking sector still in trouble, households carrying enormous debts and unemployment rising strongly, Britain risks the kind of "lost decade" of deflation that Japan suffered in the 1990s rather than a return to high inflation.

The minutes made clear that the MPC thought the risks of doing too little quantitative easing were greater than those of doing too much. "The potential adverse consequences of adding another large monetary stimulus might be less severe than the possible costs of acting too cautiously ... if it became apparent that monetary policy had been overly expansive, policy could be tightened by a combination of asset sales and increases in bank rate," said the minutes.

Danny Gabay, director of Fathom Financial Consulting, said: "Put another way, Japan is more likely than Zimbabwe. And we would completely agree with that assessment.

"Until the MPC can convincingly point to progress in unblocking bank lending to the wider economy, we would suggest that investors continue to expect the MPC to err on the side of more rather than less quantitative easing."

The minutes also made clear that while it was too early to fully assess whether quantitative easing was working, the MPC was disappointed that growth in the money supply had been lower than it had hoped.

The other six members of the MPC preferred a more modest increase in quantitative easing because they felt the immediate risks to the economy appeared to have receded and that too much could cause "unwelcome" rises in some asset prices.